China, America and the WTO

In recent years the World Trade Organization has been the main venue for airing trade differences between the U.S. and China.

By Ka Zeng for The Diplomat

February 07, 2013

Growing tensions in U.S.-China trade relations generated by the rapid expansion of Chinese exports to the U.S. have led both countries to frequently resort to the World Trade Organization (WTO)’s dispute settlement mechanism (DSM). Noticeably, both Washington and Beijing seem to be more frequently using the DSM to target issues of critical concern to their respective domestic constituencies. While the U.S.’ WTO trade disputes against China tend to target Chinese industrial policy and challenge the dominance of state-owned enterprises (SOEs), cases involving antidumping duties (ADs) and countervailing duties (CVDs) have taken up a disproportionate share of China’s WTO disputes against the United States.

Since its WTO accession, China has been the target of 29 WTO disputes initiated by its trading partners, with the United States accounting for the lion’s share of these cases. The Chinese measures being challenged by the United States include semiconductors, auto parts, intellectual property rights, trading rights and distribution services for certain products, grants and loans and, more recently, wind power equipment, renewable energy, and access to resources. Many of these cases involve the Chinese government supporting domestic enterprises through tariffs, subsidies, grants, refunds, and exemptions from taxes that either provided an unfair advantage to Chinese exporters, or restricted foreign market access in China.

Washington's focus on Chinese industrial policy and the Chinese government’s continued support for domestic enterprises needs to be viewed against Beijing’s continued heavy involvement in the economy. Indeed, while economic reforms and WTO entry have streghtened the influence of free markets in China, the Chinese government has increased its reliance on industrial policy during the past decade. The 2008 global financial crisis, which led to a substantial contraction in China’s export markets, further reinforced the role of government stimulus spending, especially stimulus spending in the state sector, in ensuring the country’s sustained growth. As a liberal international economic institution, it is no surprise that the U.S. is using the WTO to target China’s state-centric model of development.

If current trends continue the U.S. and other WTO members will continue to use the DSM to challenge China’s industrial policy and SOEs. These disputes will in turn raise important systemic issues for the organization regarding the impact of the state sector on trade flows and the ability of existing rules to cope with the challenges posed by large transitional economies such as China.

At the same time the DSM has become the primary venue for Washington to address its concerns with China's industrial policy, Beijing has more frequently turned to the DSM to challenge U.S. measures against China. Since it became a WTO member, China has only initiated 11 cases at the WTO. However, the bulk of these cases involve antidumping (AD), countervailing duties (CVD), and safeguard measures. The large percentage of such cases in China’s WTO complaints in turn needs to be viewed in light of the fact that China has become the leading target of antidumping and countervailing investigations worldwide over the past two decades, and that these measures of contingent protection are particularly damaging, have a strong chance of success, and have become the main instruments for addressing U.S. trade concerns with China outside of the multilateral framework. It is then not surprising that Beijing has turned to the DSM to address the perceived unfairness in the use of such instruments and to challenge the nonmarket economy (NME) designation, which was considered to have at least partly contributed to the rising tide of AD and CVD measures against China. And even if China does not win a particular case, it is possible that the simple action of initiating a WTO dispute may exert a deterrent effect on other WTO members by curtailing their antidumping filings against China.

Domestic politics also figure prominently in Beijing and Washington’s decisions to launch trade disputes, and play an important role in influencing the bargaining processes that follow trade disputes being launched. Indeed, the significant expansion of bilateral trade relations in the past decades has provided opportunities for Chinese leaders to identify and threaten retaliation against U.S. business groups with sufficient political clout and access to decision-makers in order to enlist their help in removing alleged protectionist measures. Examples of China exploiting divisions within the American business community include: China restricting poultry imported from the United States in the aftermath of U.S. tire tariffs against China, Beijing’s decision to launch investigations into U.S. clean-energy projects in response to U.S. trade restrictions on Chinese solar panels, and China's threats to impose tariffs against American automotive exports to China in the poultry case.

All this suggests that the WTO DSM has become the primary means for handling politically salient issues for both countries. If this is the case, the growing utilization of the DSM in the past decade may have helped to channel the tensions surrounding the bilateral trade relationship and prevented intense interest group pressure from impairing overall U.S.-China trade relations. In the absence of the DSM, it is possible that major bilateral trade disputes resulting from China’s ever-growing trade surplus with the U.S. and allegations of the undervaluation of the Chinese currency could have generated far more acrimony and tensions in bilateral economic relations.